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Why Google Created a Mothership to Oversee Itself

NEWS ANALYSIS: Google was simply too big to be just plain Google. It had to create a new business entity to keep everything in order for investors.

Is Google just too big to be regular Google anymore? On Aug. 10, the company said, in effect, "Yep, we are."

If you have any doubts about the physicality of this, just ask the city of Mountain View, Calif., where the company's headquarters sprawls out to cover most of the eastern side of the city bordering San Francisco Bay. In fact, it has offices all over the country and data centers all over the world. The same holds true when it comes to the number of businesses and projects the company currently is undertaking; in fact, few people really know what that actual number is.

So, to clarify a few things for investors and Wall Street folks in general, Google on Aug. 10 created a holding company, Alphabet, so it can reorganize its 40,000 employees and separate its core businesses from its venture and innovation side.

Google becomes a separate subsidiary that controls the search and advertising businesses, Android mobile operating system development, YouTube, Google Maps, Google Ads and the Google Play sales franchise. All told, these businesses bring home about $60 billion per year to pay all the bills.

Further reading

Alphabet will encompass new-gen businesses and ventures such as Nest, Google Capital, Calico, the Google X Works, and Google Fiber, the latter of which would like to wire the entire United States if given a chance. Google's self-driving vehicles initiative, while not mentioned Aug. 10, also will be included here.

Off the top, it looked as though Google just wanted to split everything up so it could create more CEO and president-type positions. More likely, however, the company is simply being fiscally and corporately diligent to soothe investors who had often wondered, "Exactly what businesses is Google in these days, anyway?"

Investors liked the clarity idea quite a bit. On August 10, Google stock, which had closed at $633.73 (down $1.57), zoomed up $39.27 (6.2 percent) to $673 in after-hours trading.

Management Saw Big Changes Needed

"We've long believed that over time companies tend to get comfortable doing the same thing, just making incremental changes," Page wrote in his Blogspot (another Google business) blog. "But in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant.

"Our company is operating well today, but we think we can make it cleaner and more accountable."

Fundamentally, Page wrote, "we believe this allows us more management scale, as we can run things independently that aren't very related. Alphabet is about businesses prospering through strong leaders and independence. In general, our model is to have a strong CEO who runs each business, with Sergey and me in service to them as needed.

"This new structure will allow us to keep tremendous focus on the extraordinary opportunities we have inside of Google," Page wrote.

What Analysts Are Saying

How will this play in the real world? Consumers and enterprise customers won't notice a whole lot of difference. For shareholders, however, it's a whole other ball game.

"The new operating structure is positive for Google shareholders; it stimulates exponential innovation," analyst Trip Chowdhry, managing director of equity research at Global Equities Research, wrote in a media advisory late Aug. 10.

"The new structure clearly indicates that Google will not do share buybacks or dividends; our research indicates that Google's Return on Innovation (ROi) will far exceed any Dividends or Share Buybacks," Chowdhry wrote. "Reshaping is extremely positive for GOOG shareholders; negative for lazy CEOs who cannot innovate and instead resort to share buybacks and dividends."

Does this realignment give Alphabet leeway to spend more money on development of moonshot-type projects? That part is unclear at this point; the latitude the venture businesses will have and their access to the company's whopping $70 billion cash reserves remain open questions.

"They are aware that they've got this hodgepodge of companies. Maybe it's better to sort them out a bit and make it clearer which ones are bringing in the bacon and which ones are science projects and which ones are long-term bets," Roger Kay, analyst at Endpoint Technologies Associates, told Reuters.